Financial Conditions Monitor: The "R-Star Brigade" Remains Unfazed

We systematically track the evolution of financial conditions and their underlying drivers. We intend to share regular updates of these systematic monitors with our donors on a more exclusive basis (so long as it does not compromise our public mission). This monitor is a reflection of how we think macroeconomic and policy dynamics are affecting financial conditions and, by extension, our assessment of the economic growth outlook.

For the sake of brevity and efficiency, we will keep all written content in our takeaways section.

Takeaways:

The "R-star brigade" remains unfazed by Fedspeak: Market pricing these past two weeks continues to reflect a view that the Fed will implicitly revise up their views on "r star" (the neutral real interest rate). We flagged earlier that (external) arguments for hawkish monetary policy will reflect this call as a result of resilient real economic growth, productivity acceleration, and perhaps the absence of financial distress. But New York Fed President John Williams' remarks in his comprehensive interview with the New York Times on Monday firmly expressed the opposite view (and this is probably representative of FOMC thinking). Despite Fedspeak failing to ratify a "higher r star" view and prices showing more signs of broad deceleration, markets short- and long-term Treasury yields continue to move higher. Given how early we are in the disinflationary process and the lack of cuts materializing imminently in the absence of weak growth outcomes, expectations and calls for "higher r star" may have more staying power over the short run.
Energy prices remain the biggest threat to soft landing over the near-term...

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